NO B.S. FRIDAY: The death of a beautiful economy

All economies, even ours, are vulnerable to bank runs, like what we’re seeing in Greece. It’s a bugger, but a small price to pay for what we’ve achieved.

“I thought somebody should do something about that. And then I realised, I was somebody.” – Lily Tomlin

“I thought Greece needs an economic miracle. And then I realised, I am an economic miracle.” – Jon Giaan.

I’m off to save Greece. I can’t sit idly by any longer. I’ve packed the cape and the star-spangled undies and I’m off to the rescue.

… and I’m going to squeeze in a little tour of the Greek islands as well. You know me. I’m all about work/life balance. And peace, justice and ouzo are not mutually exclusive.

Right now I’m trying to figure out how much cash to take with me… Because at the moment, the Greek government is fighting off a run on the banks, and the ATMs are in lock down.

You’re only allowed to withdraw 60 euro a day.

60-euro? Please, I spend that much on refresher mints.

Bank runs used to be much more common. We’ve never had to deal with a genuine bank run, but the threat has never completely gone away. It’s still the Achilles heel of the banking sector.

Because the banks’ business model is effectively to create money out of nothing.

Say I have $1 and I give it to the bank. They stick a small percentage aside – as a reserve, then lend the rest out. Eventually that money gets spent, and someone puts it back in the banking system. The banks put a fraction aside and lend the rest out.

And round and round it goes.

A run on a bank occurs when everyone tries to pull out all of their money all at once. Because all of that money literally does not exist. The bank probably only has like 10% of total deposits to hand. If everyone makes a claim, the best they could do is pay out ten percent.

And an institution that can’t pay their debts is bankrupt. The bank goes bankrupt.

And you’ve lost all of your money.

And when I say ‘your’ that’s not really true. Because it stops being your money once you put it in a bank.

Effectively, you’re lending your money to the bank. It becomes their money then, and you become one of its creditors.

(Probably one of its least important creditors.)

And so even with deposits in a bank, there is a degree of credit risk. If the bank goes under, you could lose all the money you lent / deposited.

It’s a total horror story.

And so Greece has put limits on how much money you can take out. At the end of the financial year the government defaulted on a €1.5-billion loan from the IMF. Now, who knows what’s going to happen.

The Greek banks are exposed. They’re sitting naked on a rock. And the Greek people are nervous. They want to get their money out before the whole show collapses. But everyone’s thinking that, and so collapse becomes a self-fulfilling prophesy.

The best you can do is stem the bleeding with withdrawal limits, and hope confidence returns in time.

Will it work?

Who knows?

Jon to the rescue.

And is the system broken? It might be tempting to say that we shouldn’t let banks create money out of nothing, and I could think that maybe there’s an argument that leaving such a crucial task to a notoriously greedy cabal of powerful interests is a bad idea, but an economy without credit creation?

That’s a pretty radical idea.

Think about it this way.

Right now, the total value of hard currency (actual notes and coins) in the Australian economy is a mere 0.3 billion.

And what’s the total money supply – once you factor in the money the banks have in deposits?

90 billion.

So we’ve effectively got a mammoth money system of $90 billion, delicately balanced on a foundation of just half a billion.

And so if you took credit creation away from the banks? You’re looking at a 99.5% reduction in the money supply. We get freaked out about a 1% fall in GDP. What’s 99.5% going to look like.

The point is that yes, credit creation creates the potential for instability – for bank runs and for things to go pear shaped.

But as a system, look at what it’s created. Poverty-related diseases are all but eradicated. Poverty itself is a lot more comfortable than it used to be. And in the first world, no one need ever go hungry.
We shouldn’t underestimate what an achievement that is – to elevate an entire civilisation out of scrounging for base survival. And then to do that by harnessing the power of our own selfish and greedy motivations..? genius.

The beauty of is all is breath-taking isn’t it? Truly wonderful.

Of course there are problems. I live in the real world. But I also think that we, as clever humans, should take the time to recognise what we’ve accomplished.

And the wheels will keep falling off from time to time. In Greece the wheels are coming off just as they go over a cliff. It looks like it’s going to get worse before it gets better. That sucks.

But hopefully lessons will be learned, we’ll build some bug-fixes, and come up with a better system.

Western civilisation marches on.

Have I got my head in the clouds? Too many pinna coladas? Does the economy look beautiful to you?

Comments

I hope a solution is agreed on soon Jon, because if the Greek people decide to ditch the Euro there is a risk that Greece is just the first domino to fall. The economy is fragile, that needs to fixed and QE is not a fix. Requiring banks to hold more reserves would be a solution but it won’t be popular. The way the system is currently being run is no better than a Ponzi scheme.

i am gobsmacked by your article jon. i wish i could join you on your trip. we have never had it so good. so banks are sort of fairy godmothers who bestow unlimited blessings upon us in the form of notes and coins. lets hope that we don’t get too many scares like 2008 when aussie depositors withdrew so much money that the ‘reserve bank’ had to rapidly print $500,000,000 more dollars to keep the circulation going! did we panic uneccessarily? yes we did..will we do it again? ..yes we will. …hmmm..only problem is it might be a lot worse next time around. i get many, many emails about the state of world affairs and finance….my poor little brain cannot get around all of it ..so i read your letters to remain sane. thank you jon….have a good trip, i mean that! and keep a stash of gold and silver coins at home or whereever (NOT at the bank)…just in case..when you get back it might be useful. cheers, ron

You forgot to mention that the Australian Government guarantees bank deposits up to $250,000.

Also, that the main reason Greeks are withdrawing money is because if they leave the Euro, then their new currency will be worth only a percentage of the Euro. This wouldn’t be a factor in Australia as we have our own currency.

So, in theory the chance of a run on banks is pretty much nil. Poor article

Chris, You must understand fist and foremost that bank deposit guarantee can not and will not work. Check APRA and IMF papers. When the banks get into financial hardship, banks will own and depositors’ money as their own under the “BAIL-IN” option as stated in IMF papers. Also check who owns Australian dollar via Reserve bank… Good luck to you…

Remember when we had GOLD as a benchmark of GDP value. When we actually created and produced something tangible, not just ideas? Remember when all Australian banks had lender of last resort facility with the Reserve Bank of Australia? When the Commonwealth Government as a matter of course actually did guarantee all depositors funds in retail banks?
Now, we have our economic feet planted firmly in mid air, our benchmark is paper money (or in our case plastic – both notes & cards) and the Commonwealth had to re-institute a qualified guarantee in semi panic form in the 2008 GFC. There are only so many rabbits you can fit in a hat to pull out when the public’s confidence is uneasy…

Remember when Argentina literally became bankrupt a decade or so back and massively devalued their currency. Gloom & doom was the contemporary cry by the world’s economists. Look at Argentina now – a model economy, more or less. The best thing that could happen to Greece, after the initial pain, would be to pull out of the Euro Zone, return to the Drachma domestically, and get ready for the influx of high spending bargain hunting tourists bringing in lots & lots of Euros & Dollars.

Greeks are Greeks, not Germans, or even Brits or French. They don’t think the same way, they don’t work the same way. The whole single currency Euro experiment was crazy to begin with. There are too many disparate social, cultural & political dissimilarities for Europe to ever be united, either economically or politically, like say The Unites States, or The United Kingdom, or even (what’s left of) The British Commonwealth. Let ’em pull out and find their own level and it’ll all even out.

Richard B thankyou I appreciate your comments because you are correct. Wake up everyone !! It took Greece FIRST to challenge Germany and Europe and their failed Austerity policies and give them a crisis that they themselves created. Historically it is an inherent Greek trait to resist any form of oppression and injustice but like any form of resistance there is always a heavy price to pay. If a NO vote is cast this sunday in the referendum it will be a resounding universal message to the FREE WORLD that the Greeks will no longer be dictated to and endure German economic tyranny !! If you believe in the Truth and the Free World then join the struggle and give the Greeks once and for all the support and recognition that they so desperately deserve !! <>

I’m curious about what you and your star spangled undies and cape plan to do to rescue a whole economy?!
I’m aware that you are awesome but?
Up up and away economic miracle man! ,don’t forget to post pics,and please wax your undie line for the good of all man kind…

Economies grow when the people can live cheaply, and produce something of value,

Once your country is rich, then you can drive up house prices, employ more and more bureaucracy who not only produce nothing, but they hinder others producing, and you hollow out the country until the economy collapses.